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Numerous working hours are spent each week in dealerships around the country analysing how to increase sales, but how much time do you spend analysing your overheads?
Declining margins and increasing overheads have become the norm over the past few years and it is essential for dealers to ensure they have this aspect of their business under control.
For every $100 spent above budget, the average dealership needs to increase sales by approximately $7,000. Low net profit to sales means managing every cost is imperative.
Dealerships that are successful at managing overheads put the time and effort into it in the same manner they do for increasing sales. They:
- know their numbers compared to other dealerships
- benchmark their overheads to the industry
- track and reward successful expense reduction
Weren’t staff costs supposed to decrease as internet sales increased? Why are dealerships employing more people? Every department should be accountable to the number of staff they employee. You must understand the staff ratios in every department and strive to be at or below the benchmark:
- total dealership gross per employee ($12,000 per month)
- new vehicle gross per salesperson ($37,000 - $40,000 per month)
- used vehicle gross per salesperson ($30,000 - $35,000 per month)
- labour gross per technician ($10,000 - $12,000 per month)
- productive to non productive staff (2 to 1)
- parts sales per employee ($80,000 per month)
- retail sales per finance employee (60 units)
You must review your entire staff list and understand which department each staff member belongs to. In most dealerships there are employees who slip through the cracks. Accountability is the easiest way to drive performance.
Employee turnover is a part of doing business. The natural reaction is to find replacement staff but you might be surprised at how often their tasks and responsibilities can be reassigned to another employee already within the business. In most cases, employees will appreciate the opportunity to learn new skills, progress within the business and receive the financial recognition for their additional responsibility.
Who in the business has the authority to raise a purchase order?
How often do your review all the purchases made in the business or track your purchases by employee? Controlling which employees are authorised to spend company money can help to reduce the risk of fraud in your business.
How many vendors do you currently have? Fewer vendors are easier to control and you can often negotiate better terms for exclusivity. Review your vendor master file annually and consolidate as many suppliers as possible. It is also important to take the time to shop around for the best available price.
You may also be surprised at how often suppliers doesn’t charge in accordance with your agreed contract. For your largest expenses (electricity, telephone, information systems, etc) check at the end of the financial year that your charges are in accordance with your contract.
Good business practice is to turn assets into sales and cash not expenses. Make sure you approve all asset write offs. Leaving it to your accounting staff may cost you money in the long run.
Vehicle Variable Costs
The largest cost in a dealership is inventory but purchasing is often mismanaged. All dealerships prepare a sales plan each year but many do not spend an equivalent amount of time on a purchasing plan. A sales mentality to purchasing can create a scatter gun result in inventory that is purchased to sell rather than purchasing inventory that will sell. This can result in over-stocking, less gross and more commission to sell old stock.
A purchasing plan or stock matrix identifies the type of inventory you are selling by numerous parameters, including make, model, colour, engine type, price range and the time it takes you to sell.
Similar to inventory management, advertising expenditure is often mismanaged and a considerable amount of money spent hunting for new customers which may be lower grossing. The best and most cost effective advertising is to your previous customers. Why not review your database for customers who purchased a vehicle that is now a desirable used car and offer to buy their car? This type of advertising is cost effective and can lead to higher gross margins.
Parts Variable Costs
Outside of inventory and people the largest cost in the parts department is generally freight. How much freight are you recovering from your customers? If you summarise the freight recovered by sales person you may uncover some interesting for trends.
The large majority of obsolete parts come from special orders for customers. Do you currently understand how your parts department manages this process? It is essential that you do.
Service Variable Costs
The key to the performance of your service department is maximising recovery. Reviewing discounting by service advisors is an important step to achieving this.
How well do you track the usage of workshop supplies? A review of workshop supply usage by service technician could help you identify leakage within this area of the business.
Don’t put off expense management, it is a process not an event. Make the following processes a part of your daily, weekly, monthly and yearly routine:
- daily accountability – track expenses to each individual
- 52 weeks – pick an expense each week and find a way to make it better
- weekly – conduct a full asset review by department (inventory days supply, aged accounts receivable, open RO’s, pending invoices, cash sales)
- monthly – set a purchasing budget for inventory and utilise a stocking matrix to get the right inventory
- annually – review all your contracts and shop for a better price